Resetting the Nigerian Economy

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Recent developments in the economy once more bring to the fore, the need to take actions that would wean the economy from excessive reliance crude oil earnings for survival. Therefore, there is need to strengthen efforts to stimulate growth and create jobs in critical sectors of the economy, so as to insulate the country from external shocks. Obinna Chima and James Emejo report

The Nigerian economy has come under pressure in the past few days due to external vulnerabilities. The situation was heightened last Monday following the sharp drop in the prices of crude oil, the country’s major source of revenue. That trading session now termed, ‘Black Monday,’ which saw the price of Brent crude, the international oil benchmark, drop by 30 per cent in few hours, to about $30 per barrel from $45 per barrel, has continued to cause unease among policymakers in the country. Since then, the crude oil price has remained soft, trading around $36 per barrel.

Beside the slump in crude oil prices, the effects of the raging coronavirus across the globe have also continued to threaten macroeconomic stability, even as analysts are foreseeing a global economic recession.

Indeed, the slump in crude oil price was triggered by a price war between Saudi Arabia and Russia. Saudi Arabia, the world’s top exporter, had launched a price war over the weekend. The move followed the implosion of an alliance between the OPEC cartel, led by Saudi Arabia, and Russia.

Owing to these, the knock-on effect of these development is already being felt in the foreign exchange market, where the naira has come under pressure, declining to a new low of $375 to US$1 during the week.

However, policymakers and private sector operators that participated at the ‘Going for Growth 2.0’ Roundtable that held in Abuja, last week, stressed the need for urgent measures to diversify the economy and insulate it from external vulnerabilities.

Already, in response to the developments in the global economy, the federal government last Monday raised a committee to cut the size of the N10.59 trillion 2020 budget, which is under threat of underfunding.

The committee, which was constituted by President Muhammadu Buhari, has as members the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed; the Minister of State for Petroleum Resources, Chief Timipre Sylva; the Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, and the Group Managing Director of the Nigeria National Petroleum Corporation (NNPC), Malam Mele Kyari.

Aside the task of reducing the size of the budget, the committee is also saddled with the responsibility of reducing the oil benchmark from the approved $57 per barrel to reflect the current realities.

Ahmed said the committee was expected to submit its report to the president on its eventual decision latest Wednesday.

She explained that the committee would determine a new oil price benchmark, the size of a new budget and subsequently make such new decisions public.

She said: “We just met with the president to discuss the matter of the impact of the coronavirus on our economy and Mr. President has formed us into a committee, with the Minister of State, Petroleum Resources, the Central Bank Governor, the GMD NNPC and I as members.

“Our mandate is to make a quick assessment of the impact of this coronavirus on the economy, especially as it affects the crude oil price. We will be writing a report and brief Mr. President tomorrow or Wednesday morning and after that, we’ll also have more substantial information for the press.

“But it is very clear that we will have to revisit the crude oil benchmark price that we have of $57 per barrel; we have to revisit it and lower the price. Where it will be lowered is the subject of the work of this committee.

“What the impact will be on that is that there will be reduced revenue to fund the budget and it will mean cutting the size of the budget. The quantum of the cut is what we are supposed to assess as a committee.

“This is just an initial update to inform you on the directives that we have and subsequently we will be sending a report to the president, after which we will be briefing the press on the actions that government will be taking.”

Going for Growth

But speaking at the ‘Going for Growth 2.0,’ Ahmed allayed fears of an economic crisis in view of the effects of the crash in global oil prices and the Coronavirus epidemic on the nation’s economy.

She called on Nigerians not to panic as the drastic fall in global oil price threatens the country’s 2020 budget as well as its macroeconomic stability.

According to Ahmed, Nigerians must adjust to life beyond oil, following the bleak outlook on the global economy occasioned by the Coronavirus outbreak.

She said there was no doubt that the combination of crude oil price crash and Coronavirus epidemic would put severe strain on revenue, foreign exchange and other sectors of the economy.

The minister said the current economic challenges arising from the dramatic drop in oil price came as a huge surprise to the government.

She called on stakeholders to work together and seize the opportunities provided by the crisis to reset the economy.

The minister said the government would need to resort to measures which were hitherto delayed, adding that this is the right time to act.

She explained: “For us it was a shock and unexpected; we didn’t think the price of oil would go as low as $30 per barrel. So, it came to us as a great surprise. These are very strong headwinds and these headwinds reinforce a wake-up call for us as a country to look towards a life without oil and the time to do that is now.

“But for all of us in this room, we have a responsibility to ensure that we do not spread panic and that we don’t allow speculation, which will not be in favour of our country. We need to put our hands together to weather this storm.

“This is not something that the government can do alone nor is it something that the private sector can do alone; it has to be a partnership- a very strong one. We need to work together to take the opportunities that this same crisis has provided for us.

“For us in government, there are some measures that we need to take, which we have not taken and this is the right time to take those measures.

“We are working as a government to strengthen our macroeconomic fundamentals, which some sectors of the economy were already dished before the crisis and so the crisis is only exacerbating the situation and we knew about that.

“There is no doubt that the combination of crude oil price crash and Coronavirus will put severe strain on our budget revenue, forex and many sectors, we are drastically reviewing the budget as well as redoubling our efforts to raise revenue and plug the leakages and intensify engagement and support of sub-national entities and the private sector in our economic recovery and growth programmes.”

Monetary Policy Measures

Also, the Central Bank of Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, said the CBN had already embarked on measures to significantly reduce lending rates, which have resulted in total banking credit rising to over N17.4 trillion as of January. He reiterated the need to adopt measures that would diversify the economy given the external headwinds that the Nigerian economy faces, which have emerged as a major threat to global growth in 2020.

He added that the impact of the Coronavirus across over 100 countries has affected global supply chains, as well as demand for goods and services.

“The CBN fortunately had already embarked on similar measures, which have resulted in significant reduction in lending rates, as part of our efforts to boost growth.

“Working with the fiscal authorities, we will not hesitate to deploy additional measures to strengthen our buffers and insulate the Nigerian economy from the global headwinds,” he said.

According to him, in the last three years, the Nigerian economy had remained on a positive growth path as Gross Domestic Product (GDP) growth has remained in the positive territory for 11th consecutive quarter, following the 2016 – 2017 economic recession.

“One of the critical measures that helped to boost growth in 2019 was the impact of the central bank’s new minimum loan to deposit ratio, which was initially at 60 per cent and subsequently raised to 65 per cent.

“We also imposed restriction on access to open market operations (OMO) auctions in order to encourage banks to lend to the real sector.

“Indeed, the banking sector has responded positively with the rise in aggregate industry credit from N15.3 trillion in May 2019 to over N17.4 trillion in January 2020.

“I am aware that these loans have been granted to borrowers across different sectors at considerably lower rates. Although a lot more still needs to be done; we intend to sustain these policy measures as it will help support improved economic growth and create more employment opportunities,” Emefiele added.

He explained that notwithstanding current measures aimed at supporting growth, the economy faces challenges as GDP growth remains below annual population growth rate at 2.6 per cent.

He said: “Second, our reliance on crude oil for more than 80 per cent of our foreign exchange earnings and 60 per cent of government revenues means our economy is exposed to the impact of the Coronavirus on crude oil prices.

“Projected declines in revenues as occasioned by the drop in crude oil prices, constrains the government’s ability to meet its infrastructure commitments in 2020, which is vital if we are to achieve double digit growth.

“Given this challenge, it is imperative that this roundtable session comes up with well-structured funding models that will mobilise funds from banks and other financial institutions to fund critical infrastructure projects, while providing attractive returns to investors.

“We must also use this opportunity to consider funding for infrastructure projects that improve access to markets for farmers and SMEs, while also connecting the railways to our ports, in order to increase our non-oil exports.

“Such schemes will support greater economic growth and help free up funds for the government to focus on other priority objectives.”

According to him, the current oil price shock validates some of the measures taken by the fiscal and monetary authorities on diversification of the Nigerian economy.

Tough Times Ahead

Also, the Group Managing Director, Nigeria National Petroleum Corporation (NNPC), Malam Mele Kyari, has expressed the corporation’s readiness to strategically put in place measures that would reduce the cost of crude oil production in Nigeria to create a market for Nigeria’s crude and make the country a choice destination for Foreign Direct Investment (FDI).

He, however, said the country should plan for the possibility of a further drop in crude oil price, saying “we haven’t seen the bottom yet.”

In his contribution, Kyari expressed the corporation’s readiness to strategically put in place measures to alleviate the cost of crude oil production in Nigeria to create market for Nigeria’s crude.

He noted that due to the Coronavirus pandemic, Nigeria has about 50 cargoes of crude oil that have not found landing, adding that this implies that there are no off-takers for them for now due to drop in demand.

He said in the face of the Coronavirus global pandemic, countries like Saudi Arabia have given discount of $8 and Iraq $5 to their off-takers in some locations meaning that when crude oil sells at $30 per barrel, countries like Saudi Arabia is selling at $22 per barrel and Iraq selling their crude at $25 per barrel.

According to him, the oil price crash on Monday signified the importance of oil to the global economy.

He added that oil price will continue to shape activities in the global economy.

“We used to say when the financial sector collapses, everything collapse. But certainly, it is the other way round. When the oil market collapses, everything collapses. So oil is the only commodity that the beneficiaries panic when the price goes up,” Kyari said.

He predicted that fossil fuel would remain significant contributor to energy need in the next 40 years.

“But what would not be there in the next 40 years would be inefficient producers because as we speak today, we are getting production from the least expected places. Nearly every country now produces oil and that means that the best of people who would remain are the people who would produce oil at the cheapest cost.

“Much as these are high expectations, but you must produce them today even at low prices. And the assumption for this year was $60 per barrel. Now, we are facing sub $30 per barrel and potentially we haven’t seen the bottom. We haven’t! And this is a challenge to us as a country and it is difficult to manage. It simply implies huge deficit for all of us and it would radiate in all sectors, including the financial sector,” he said.

He added: “Today, I can share with you there are LNG cargoes that are stranded because there is an abrupt collapse in demand associated with the Coronavirus. We hope that is the only reason. Today, for Nigeria’s crude, we have about 50 cargoes that have not found landing.

“It means that they don’t know where to take them to and this is so with many other jurisdictions. So, when you sell in the market at $32, there is a huge problem. There are so many countries whose cost of production is at $30. So, when you produce at $30 per barrel, you are out of business.

“Beyond that, you have competition, which depresses the potential of coming out of the impact of Coronavirus for at least three months. So, we need to prepare for the shock. Even if price rise up again – we have backlog of production that is hanging and has to be resolved. What that means is that we would have the impact of this shock for some time.”

The Minister of Works and Housing, Mr. Babatunde Fashola, said funding remains a key factor to infrastructure development.

According to him, it would require N288.72 billion to complete critical road projects, particularly those that lead from the Lagos, Warri, Port Harcourt and Calabar ports to the savannah and to the borders with Niger Republic to Cameroon. “If we make those roads work, then we score a big dent in easing transportation by road across Nigeria. The rail is progressing because the money is there: Lagos-Ibadan, second Niger Bridge and Abuja-Kano are progressing because the money is there. So the big elephant is how do we find the money?”

Fashola decried a situation where budget releases to finance infrastructure had often fallen 50 per cent between 2016 and 2020.

“What we have seen from our 2016 to 2020 budget is that we are getting just under 50 per cent budget releases. And that speaks again to the challenge that the minister had had to deal with: raising revenues in order to fund infrastructure,” he pointed out.

Similarly, the Minister of Transportation, Mr. Rotimi Amaechi, gave reasons why the country was yet to float a national shipping line.

He explained that the failure of the petroleum ministry to implement the Cabotage law had not encouraged private sector investment.

He said: “When we were to bring in the metals, the iron for the tracks, just to move it from China to Nigeria, I was excited to support a Nigerian company that has a shipping line to bring it from China to Nigeria. And you know the response we got? That there’s a Chinese law that says only Chinese vessels can carry Chinese cargoes.

“Now, we had that law but either NNPC or the Minister of Petroleum has refused to implement that law…Now if you want to encourage private sector investment in Nigeria, then that law should be implemented.

“In fact, when I became minister for transport, I announced to the country that we will establish a national shipping line. So what does the law say – 60 per cent of Nigerian investors and 40 per cent of foreign.

“We travelled to Singapore and a foreign company in Singapore was ready to invest. We came back here, till today no Nigerian has brought one kobo even though we installed a committee for that purpose. That’s why we don’t have a national shipping line today.”

Private Sector Intervention

To the Chairman, United Bank for Africa Plc,  Mr. Tony Elumelu, power is extremely important for any country to realise its potential.

According to him, access to electricity, “is key for the development of every economy and we believe that if we can all work together and improve power, it will propel growth in our country seriously.”

Also, the Chairman, Ikeja Electric, Mr. Kola Adesina, noted that, “No matter the volume of gas available in the country, no matter the installed and available capacity, no matter the extent to which power can be evacuated, if it is not effectively distributed, it is a waste of time. So, we need to frontally resolve issue around power distribution.

“You hear a lot of commentators speak to the fact that we have installed capacity of 13,000MW and the transmission company say we can transmit 7,000. However, today, you see the distribution companies supplying just 3,500MW.

“Nigerians don’t want excuses and all they are looking for is that there should be electricity. For 200 million people, generating 3,500MW is appalling to say the least. So, there is need to start seeing electricity from a commercial and economic perspective.

“Without you taking the commercial and economic view of power, never will you be able to ultimately get the power you require.”

On his part, Founder and Chairman of Zenith Bank Plc, Mr. Jim Ovia, stressed the importance of a vibrant banking sector for the diversification of the Nigerian economy.

Ovia said Nigerian banks over the years, had contributed significantly to the growth of the economy.

“In 2004, before consolidation, all the Nigerian banks put together, had a total market capitalisation, which was below N12 billion and all of them put together could not lend one-tenth of what Dangote Cement required. But today, one of the top tier banks is much larger than all the banks’ shareholders’ funds put together in 2004.

“So, that is a testimony that Nigerian banks are solid. We have even started to export our expertise to West and East African countries. Nigerian banks in Ghana are the ones showing the way. They didn’t know about recapitalisation, until we thought them,” he said.

Also, the President of the Dangote Group, Alhaji Aliko Dangote, urged the government to stop paying lip service to economic diversification, adding that the diversification of the economy needs to be achieved urgently, following Monday’s crash in the price of crude oil.

Dangote said the country must also take advantage of its huge market and address the high cost of doing business, diversify into agriculture and manufacturing to reset the economy in the right path.

He added: “The diversification of this economy is very important, in fact, we are late. Since 1979 that I came to Lagos, people have been talking about the diversification of the Nigerian economy. You can only diversify the economy through manufacturing and agriculture. Manufacturing actually creates a lot of jobs, creates middle class and also transforms countries.

“These are areas we need to really focus on. But how do you diversify an economy and go into manufacturing that makes sense and also makes it an inclusive growth? Then you need to actually do what we call backward integration or import substitution.”

Dangote noted that Nigeria has a readily available market because of its huge population and stressed the need for government to remove factors that have continued to constrain the manufacturing sector.

According to him, providing enablers such as road and power infrastructure would have the government effectively diversify the economy from crude oil.

He said: “Well as you know, for the crash of the oil price, it is imperative that we diversify this economy. Our economy is great because we have a local market because when you look at the economy of Asia, it’s mainly focused on exports. But we have a domestic market: this is a country with about 200 million people apart from the rest of the ECOWAS market where our imports last year was almost $47 billion.

“It is not sustainable, we cannot have 200 million people growing at about 2.7 per cent and then we are importing most of the things that we are consuming. I think we really need to be serious this time around so we don’t just keep talking about diversification…it has been very elusive I don’t know why. It is possible but we are not really focusing on that.

“We need to reduce the cost of doing business: the cost of doing business can actually affect everybody. I can tell you the truth, the government lost so much money last year in the traffic logjam of Apapa alone. We as a company, our three companies lost over N30 billion in terms of profits, which means the government will also collect less taxes. So we need to look at infrastructure, we need to look at power.”

The Managing Director/Chief Executive, Access Bank, Herbert Wigwe, said only infrastructure spending would be able to solve problems relating to economic sustainability.

According to him, with the current economic predicament, coupled with the threat posed by the spread of the coronavirus, the knock-on effect on the country could be monumental without a sustainable economy at this point in time.

Specifically, Wigwe, stressed that if the challenges in the power sector are resolved, the overall cost of production in the country could drop by as much as 30 per cent to 40 per cent.